Economy will drive banking performance in 2010, finds KPMG's UK Banks Performance Benchmarking Survey

- Retail banking should begin a slow climb to growth, assuming economic recovery
- Questions hang over the sustainability of investment banking performance

A new report from KPMG - the UK Banks Performance Benchmarking Survey - concludes that retail banking will continue to improve should the economic recovery continue, but that questions hang over the sustainability of investment banking performance.
Investment banking, supported by benign conditions particularly in the first half of 2009, carried the banks through last year, offsetting significant impairment charges across their businesses. Retail banking was less successful, but performance picked up in the second half of 2009. The banks which are not publically owned and operate in the Asian and emerging markets performed significantly better than the others.
"Banks certainly seem to be more confident about the future, and most even predict a return to growth this year. That being said, considerable uncertainty remains regarding the economy and the future of regulation, particularly relative to capital requirements,” said David Sayer, Global Head of Retail Banking.
"As a result, this year, we would expect banks to maintain focus on core banking activities, work to reduce their dependence on wholesale funding and leverage and take steps to improve their liquidity profile,” Sayer continued.
Retail Banking
A benign economy would enable retail banks to build on the fragile profits of 2009. In a 'V' shaped recovery, impairments would likely stabilise and margins would be expected to widen; the sale of non-core assets will have shored up banks' capital positions and they would be able to reduce their dependency on the competitive retail savings market.
Sayer went on to say: "If the economy turns down and unemployment rises, however, then impairments will outweigh widening margins and these businesses will, at best, make a negligible return for a number of years.”
Investment Banking
Commenting on the outlook for investment banking, Bill Michael, UK Head of Financial Services, said:"The continued contribution of the investment banks is by no means assured. Less volatile market conditions over a period of time will dampen flow businesses and the withdrawal of government support schemes combined with rising interest rates could bring an end to the current period of cheap liquidity. In addition, some of the UK investment banks remain burdened by legacy asset portfolios, are faced with an uncertain economic outlook and will be impacted by a host of upcoming external market changes. Therefore, it will be a considerable challenge for investment banks to emulate their successes of 2009. In the quest for greater returns, there is a concern that investment banks will return to greater risk-taking.”
Other findings include:
- The economy is key
Growth in retail banking is fundamentally reliant on the continuation of the economic recovery. In the most positive, 'V'-shaped recovery, bad debt issues become more manageable. If the economy experiences a double-dip recession, however, both prices and wages will fall resulting in more bad debts and more difficulties for the banks.
- Impairments outlook
Unsecured impairments rose in 2009 fuelled by increasing unemployment, but the broadly flat movement in house prices prevented a dramatic upswing. Although the sharp reduction in interest rates has helped many borrowers cope, many mortgage payers will be hit hard by even small increases in base rates - many mortgage bills could double with a 2 percent rise. Unemployment remains the single most important factor in determining provisions, however.
In addition, real estate provisions were substantial in 2009 and reflect the underlying weakness of commercial property values. As commercial property underpins much business lending, weakness in this asset class limits borrowing capacity for the sector.